Q3 2014 Stewardship and Managing Equity Interests for Our Clients
Old Mutual Global Investors manages money on behalf of its clients with the aim of generating returns to meet their financial aspirations. As part of that process, we regard using our powers as shareholders, particularly the ability to engage with companies on a range of issues, as a key tool for relevant equity funds. We are stewards of our clients’ interests and it is appropriate we report on that role. Our report is also consistent with fulfilling our obligations under the UK Stewardship Code 2012.
In these reports, it is generally our practice to remove identification of the companies with which we are engaging: in our experience, undertaking discussions which may occasionally be sensitive or delicate in the glare of publicity is damaging. Publicity can cause a defensive reaction and hardens views. We prefer to conduct a sensible dialogue with companies where, in the event of a change of policy, this can be adopted and not seen as a management climb down. It is part of the need to build an element of trust, permitting clear and occasionally frank communication and challenge.
Our voting policy document (http://www.omglobalinvestors.com/corporate/about-omgi/governance/) states that we control a wide range of equity interests. These range from short-term holdings, in which case it is not appropriate to vote, to derivatives (which cannot be voted) to funds where the focus is on trading. Where our stewardship can be most effective, and where the bulk of our work will occur, is in long-only funds where the emphasis is on understanding and building a long-term investment and relationship with the company.
A sample of our activity for the July -September quarter of 2014 is set out below.
Gender diversity - Glencore
We met the chair of Glencore and welcomed their recent appointment of a woman to the board, the last FTSE100 company to do so. Consistent with our support for the 30% Club (see below), we encouraged the appointment of a further female board member.
We also discussed the structure of the board and senior executives, including longer-term succession planning, noting the partnership culture that persists at the company.
Strategy, performance and pay
Whilst it is sometimes disappointing that the public profile of executive pay means a disproportionate amount of time is spent on executive remuneration, we had a recent constructive engagement occasioned by a company consulting shareholders on senior management pay policy and implementation of that policy.
In particular, the performance conditions attaching to conditional long-term incentive share plan awards were open for discussion. The proposals centred around dropping a target based on ROC (return on capital) and instead using targets linked to the strategic plan- albeit the degree of performance required would not be disclosed. In principle, we tend to be opposed to measures based on achieving elements of a strategy over the longer term because we believe in reward for results, not process. All companies require some flexibility to adapt their strategies and we believe linking pay to a particular action might restrict the ability of the company to initiate any change. We are also sceptical of the non-disclosure of performance targets attaching to executive incentive schemes.
This company, however, is in the process of adapting its business model to a changed environment. We have engaged with the board on strategy and performance and the pay consultation provided an opportunity for further discussion on the sustainable development of the company: pay was a side issue. Our meeting with the chair of the board’s remuneration committee was helpful. Discussions included the elements of the strategy, how those elements fitted in to the development of the company’s plans and objectives, the investments the company is making (and which will therefore reduce, for now, earnings per share) and the company’s performance generally.
We were satisfied with the steps the company is taking and have sufficient confidence to trust and support the board on its strategy and implementation of that strategy.
We will therefore support the pay proposals.
A company where we held a small percentage announced the proposed appointment of a new chair. We were aware that, under this person, had failed to perform in a previous chief executive role. As a result, we had no confidence in the individual, either as an executive or as a potential chair of a listed company. Our shareholding was not at a per centage which would have much influence with the company but recognising the power of collective action, we contacted larger shareholders and raised the issue with them. We knew that, in turn, some of those shareholders have also raised the appointment with the company.
We met the senior independent director, who had led the process for the appointment of the new chair. We discussed our concerns and the reasons why the board felt the appointment was sound. The meeting was constructive and whilst the board did not agree with our view, the senior independent director offered to meet us again in a few months to discuss how the board is working under the new chair.
We met the chair of a mining company. The company had reported a number of deaths in its operations during the last financial year. ? Why did people die?
The company had taken over a number of mines that were formerly state-owned. For a long time under government control, there had been little or no investment in infrastructure or people. The company, on taking control of mines, had to train staff, change their behaviour and culture and has imposed a zero-tolerance approach to failure on these issues. The chair provided an example of one mine where staff had been drinking alcohol, both before shifts and underground during working hours – last year, the company therefore undertook 20,000 breathalyser tests at that mine as staff went into, and out of, the mine. Anyone failing the test was fired.
A further indication of the seriousness with which the company views safety is that every fatality is reviewed by a health and safety committee of the board, conducting interviews and reconstructions. The fact that the board was involved in a thorough process was, we believe, positive.
Aligning interests? AstraZeneca
The Head of UK Equities in our team had a letter published in the Financial Times in May 2014 regarding the takeover bid from Pfizer for AstraZeneca. In the letter it was suggested that incentive share awards for senior executives of AstraZeneca should be tied to the price Pfizer was offering for the shares in order to ensure alignment between shareholders and executives.
AstraZeneca was dismissive of the idea but we have subsequently met executives from the company. Their case on rejecting the advances from Pfizer is potentially strong. Furthermore, after the bid discussions, we noted that the CEO purchased 46,200 shares, worth a total of 2 million pounds. The purchase of shares by the CEO is a very positive alignment of interests and a commitment to the company.
We had the opportunity to meet the incoming chief financial officer of a company. (His predecessor was about to retire.) It provided a useful two-way communication, as well as an introduction for both parties. He was keen to seek shareholder views, on their perspective of the company, strategy and performance. As shareholders, we had the opportunity to learn more of his background and the strengths he could bring to the business.
The company has also been seeking non-attributable feedback using a consultancy firm. We participated in that feedback, which provided a means for the board to learn, or confirm, how they are viewed by shareholders.
A New Chair
The chair of a company is about to retire. The process of recruiting a new chair provided an opportunity to discuss with the senior independent director (SID) both the recruitment and the performance of the board.
The senior independent director confirmed the company is looking for a chair with plc experience, with an understanding of the impact of digital markets. We confirmed that this might include people from outside the industry and were concerned that recruitment might only be from a relatively narrow range of experience from within the industry. Recent board appointments had, according to the SID, worked well.
We also discussed the executive members of the board and voiced our opinion that the CFO needed to present a counter-balance to the CEO, given the significant role of the CEO and the particular circumstances of the company. There was also some uncertainty regarding how messages were conveyed on financial issues.
The senior independent director noted our comments, welcomed the engagement and undertook to review these issues. The engagement was therefore, constructive and successful on both sides. Regarding the appointment of a chair, the director undertook to consult major shareholders on the person appointed prior to an announcement. This is an increasingly common practice that permits a company to anticipate any objections ahead of anything becoming public.
We contacted a company to discuss their marketing. Whilst we would not claim to be marketing experts, this was more focused on the potential views of regulators and the perception of consumers, indeed whether the product was viable. The issues included the practice of offering free trials of a product which automatically led to monthly billing unless the consumer went through an awkward cancellation process. In addition to questions regarding the perception of aggressive marketing and the availability of cheaper or (for at least some consumers) free alternatives, together with the potential interest of regulators, brought into question the viability and valuation of the product line. Our discussions with the company included the participation of operational executives who explained the regulatory environment, the details of their products and changes they are making to improve it, together with justifying how the product provides value to consumers. The company generally provided satisfactory answers but it is an area that will continue to be monitored.
We have added our support to the objectives of the 30% Club by becoming a member of the Investor Focus Group of the 30% Club. The 30% Club is a group of chairs and CEOs of leading companies with an aspirational goal for boards of FTSE100 companies to consist of women by the end of 2015. The Group does not support mandatory quotas. We believe that diversity at all levels of an organisation is positive, is consistent with Old Mutual’s stance on responsible investment, and is simply the right thing to do.
Old Mutual Global Investors is currently implementing voting across its funds in conjunction with the policy guidelines as set out at (http://www.omglobalinvestors.com/corporate/about-omgi/governance/). The company intends to vote on all applicable holdings by early 2015.
We intend to revise and update our statement of compliance with the UK Stewardship Code to reflect our new practice accordingly.